There are several reasons being given for yesterday's market weakness. John Paulson, who made more last year shorting the housing sub prime stuff than the Vatican, said we're only one third the way through the credit crisis. A strategist at Royal Bank of Scotland feels inflation is going to be a huge problem and the US stock market has a long way to fall.
A response if I may. Goldman Sachs is stitching together a rescue of a defaulted SIV, or Structured Investment Vehicle. These are off balance sheet investment pools that borrow a ton of money and buy ten tons of assets. All well and good if you can sell the assets. Turns out trying to sell sub prime mortgage bonds proved difficult and a lot of SIV's hit the wall. There are over $400 billion of such structures. A lot were set up by banks who took the things back onto the balance sheet. Some had no lineage back to a bigger partner and defaulted. One of those was Cheyne Capital, a $7 billion package of toxic waste. Goldman will have an auction in mid July to restructure Cheyne. The Financial Times quoted a banker yesterday who said trying to solve this issue proved like "nailing jelly to a wall." Forget the details because they are numbingly complex. The point is Goldman has figured a solution and, if this flies, there are immediately $18 billion more lined up and ready to go.
Joe Battapaglia said on Larry Kudlow's show last night this was but a drop in the bucket (See video). With respect for Joe, (and I mean that- have you ever met the guy, he's a defensive tackle size man ... I'm 185 and more a wide receiver, except I'm slow and have terrible hands), I agree this is a drop in the bucket, but it's the first drop and an important one. The solution has to begin somewhere. "A journey of a thousand miles is taken one step at a time." (Mao)